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My thin reeds say the first half of 2010 will be surprisingly strong in the U.S.

posted on February 18, 2010 at 4:29 pm
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economic recovery

Thin reeds. You wouldn’t want to count on a single one to support much weight but bind enough of them together and you can sail across the Atlantic—or find a profitable investing trend before it’s visible in the official numbers.

Sometimes the reeds all point in different directions and you can’t build an investing tactic out of them.

Sometimes, though, day by day they seem to fall into bundles that promise to be strong enough to support a buy or two or three.

I think that’s happening right now. In recent days I’ve seen a number of thin reeds that bundled together add up to a stronger U.S. economy—for the next quarter or two—than most investors are now expecting. And certainly these thin reeds are pointing to a trend that you won’t see in the official economic measures such as today’s (February 18) disappointingly high numbers of workers filing initial claims for unemployment. Many of the official numbers—such as the 31,000 rise in initial claims to 473,000 when economists had been projecting a drop to 438,000– still say the economy stinks.

The thin reeds I’m collecting, however, say that through the middle of the year at least U.S. growth will be stronger than expected. (They’re still not telling me anything good about the second half of the year. To the degree there is a pattern it’s not pointing up.)

So what’s all this talk about “thin reeds”? Have I been up late watching YouTube video of the Ra II expedition again? Channeling my inner Thor Heyerdahl?

Not in the least. If I’m channeling anyone it’s Leo Dvorsky, for 16 years the outstanding manager of Fidelity’s Contrafund. Fidelity owned Worth magazine when I first started work there in the early 1990s and I had a chance to talk with Dvorsky, by then sort of retired, when he dropped by to see what nonsense we journalists were passing out.

Dvorsky loved to toss out what he called a thin reed–an odd piece of data, something he’d noticed around Boston, some part of a quarterly report—and then spin out a trend from that scant evidence until it either seemed like the most logical thing in the world or collapsed of its own weight.

Working at a great mutual fund company that believed in giving its fund managers research and then more research, Dvorsky had thought hard about how a manager adds value.

 Part of out-performing the average investor is working harder and digging out information that few other investors have. It was tough then and even tougher now to get information that no one else had found when so much great information is available either free on the Internet or from relatively inexpensive sources.

Part of it, though, is what you do with that information. Can you put it together in new ways that let you see patterns before others see them? Can you turn a piece of information this way and that until suddenly you find meaning in it before anyone else has?

Can you take a thin reed, a piece of information that most other investors know but that they’ve decided doesn’t mean much of anything, and find a trend before the bulk of investors do? (And let me remind you that you do want the bulk of investors to find the trend that you’ve found and sooner rather than later. It’s their discovery that will lead to a higher stock price and profit for you.)

So let me run my collection of thin reeds by you—in no particular order–and tell you what I’ve built with them.

  • Whole Foods Market (WFMI) beat Wall Street earnings projections when it reported quarterly results on February 16. More importantly the company announced better than expected growth in same store sales of 3.5%. Whole Foods is what market researchers call an “aspirational” retailer. Aspirational retailers take it in the neck when the economy slows since consumers struggling to make ends meet go to Wal-Mart (WMT) and forego the organic blueberries and the wild salmon. Same store sales growth at Whole Foods along with the good holiday growth at other aspirational retailers such as Coach (COH), where sale store holiday sales climbed 3%, suggest that the U.S. consumer is feeling better than the still horrendously high unemployment numbers would argue. It’s important to note, though, that both of these two aspirational companies moved price points lower during the recession and the early stages of the recovery.
  • Credit-card companies mailed 398.5 million solicitations in the fourth quarter of 2009. That was a 46% jump from the third quarter and the first quarterly increase since 2007. But the bulk of that volume went to just the most credit worthy. About 84% of the total credit-card mailings in the fourth quarter were sent to consumers with a FICO score of 720 and above, according to Synovate. Mailings to customers with a FICO score of 620 or lower made up just 6% of the total.
  • Nokia reported a 30% jump in sales for the fourth quarter—and then announced that it would cut prices by 10% for all its phones. That puts Nokia’s cheapest smartphones in a price war with the mid-range models from Sony-Ericsson and Samsung. The price war comes even though Nokia is predicting a 10% increase in unit sales for the wireless phone industry in 2010.

Here’s how I bundle these reeds.

First, the consumer is if not in full-throated spending frenzy at least no longer hunkered down in fear. I think that means it’s time to make the transition from recession favorites such as Wal-Mart to the stocks of companies that will do better if discretionary spending picks up. (I’d put Jubak’s Picks McDonald’s (MCD) in that category since consumers have been hunkering down by eating at home instead of fast-food restaurants.)  Stocks that fit this description include Nordstrom (JWN), Williams-Sonoma (WSM), and Imax (IMAX). I wrote about an official number that adds support to this conclusion in my post http://jubakpicks.com/2010/02/09/and-now-for-something-not-about-the-euro-good-news-for-u-s-growth-in-todays-inventory-numbers/ .

Second, the recovery isn’t going to produce massive profit growth because everybody whether they’re selling wireless phones or PCs or whatever is trying to pick up market share by cutting prices. I’ve explained this phenomenon in my post http://jubakpicks.com/2010/01/19/get-your-portfolio-ready-for-the-profitless-global-economic-recovery/  and in another post http://jubakpicks.com/2010/02/09/and-now-for-something-not-about-the-euro-good-news-for-u-s-growth-in-todays-inventory-numbers/ I’ve explained why this means the stock market could run out of gas in the third and fourth quarters.

Third, the credit crunch brought on by lenders reacting to the excesses that caused the Great Recession then by cutting back on lending now is by no means over. The expansion of credit that is evidenced in the increased number of cards being mailed out to consumers at the top of the credit score heap will fuel the economy for a while. But what a full recovery needs is looser credit for companies and consumers that are good risks but that aren’t perfectly risk free. I worry that the second half of the year—and 2011—won’t bring a significant loosening of credit. Banks are still busy reducing the size of their balance sheets by cutting their loan portfolios. Most banks aren’t trying to gain market share in their lending market or to acquire pieces of troubled institutions that would increase their balance sheets. (US Bancorp (USB) is one of the few still on the hunt and it sticks out like a sore thumb. It’s on my Jim’s Watch List, by the way.) Mortgage foreclosures are expected to rise to 4.3 million in 2010 from just 3.4 million in 2009. I can’t imagine that will make banks just giddy with joy about lending.

To me this signals that the U.S. economy, in the short run (that is the next quarter or two) is going to be stronger than is now expected, that staying in the market or even putting some new money to work in the market over the next quarter or so is a reasonable move, and that the second half of the year is still not showing any pattern that makes it look more promising to investors.

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15 comments

  • Shameus on 18 February 2010

    Good post.
    I wonder what you make of MXWL’s recent earnings and price slide?

  • EdMcGon on 18 February 2010

    Bad news Jim. The waiters are coming for the punch bowl:
    http://www.foxbusiness.com/story/markets/industries/government/fed-raises-discount-rate-fed-funds-rate-unchanged/

    This was MUCH faster than anyone anticipated. No doubt the PPI today influenced this move.

    While we’ll have the big market short squeeze tomorrow, is it possible we might see a major selloff soon?

  • rheldmann on 18 February 2010

    Jim,
    I’m not seeing the reeds. I think financials hold the key.

  • EHG on 18 February 2010

    Ed,

    I would think that the increase in the discount rate by the Fed is an indication that they think that things are getting better and back to normal.

    Why should the market take it badly?

  • NB on 18 February 2010

    Below is a cut-and-paste. LEI seems to agree with you; growth through 1H’10.

    http://www.businessinsider.com/chart-of-the-day-the-conference-board-leading-economic-index-lei-2010-2?utm_source=Triggermail&utm_medium=email&utm_campaign=CS_COTD_021810

    This was today’s most important data point to pay attention to — the Conference Board’s Leading Economic Index (LEI).

    It rose 0.3% in January, after rising 1.2% and 1.1% in December and November respectively. This is shown by the red line above.

    The LEI has been rising for ten straight months, and had a critical inflection point right before the gigantic market rally of 2009. It also correctly began to dip before the U.S. entered recession in December 2007. Simply put, you made a lot of money listening to it recently, and historically it’s one of the few reliable forward indicators that exist.

    While today’s January release was slightly weaker than the 0.5% rise expected by many analysts, it nonetheless continued the LEI’s important uptrend. We also shouldn’t forget that the LEI is currently higher than at any time in many years — which means that we can count on growth to hold up at least through the first half of 2010 just based on where the economy is now.

  • dbarstow on 18 February 2010

    One other possible thin reed might be increased spending by businesses. Witness decent earnings and outlooks by Cisco, IBM, HP, and even Deere. Also note improving numbers in durable goods orders.

  • waylon01 on 18 February 2010

    Great post, if only unemployment would drop steady.
    Seems the Fed announcement is causing a knee jerk reaction in Friday’s futures. With the trouble in the Euro zone, I’m curious to see when the ECB will try to put a floor under the Euro.

  • Jim Jubak on 18 February 2010

    EdMc, I think the Fed’s move is a rather thick reed–hey, that’s good–think I’ll use it tomorrow–in favor of the economy is stronger than we think position. They wouldn’t be taking this very preliminary step to move the discount/fed funds spread back toward normal if they thought growth was weak. I admit I was hoping that I’d have a few months to bask in my foresight (and make some money) before the Fed came aroiund to my way of thinking.

  • EdMcGon on 19 February 2010

    The Fed news is kind of good news/bad news, and could be looked at either way by the market, although I suspect the market will take Jim’s view, that it’s basically a good sign.

    As Waylon pointed out, appropriately, there is still the European problem, looming like a serial killer in a B movie.

    I would add inflation to our concerns now, and use the Fed raise as justification for my position. High inflation right now could hit the economy like the old stagflation from the 1970′s.

  • Brownte47 on 19 February 2010

    The Fed move will be interesting on Today’s market. I do see some pent up demand. I helped a friend load a newly purchased washer the other day. I need to buy one too! (Computer, car and maybe a bigger house!) I have to admit that a government tax program does seem to get me off my duff to pull the trigger! Did I mention I have my first starting college in the fall.

  • djpoints on 19 February 2010

    Just a comment on Whole Foods being an “aspirational” retailer. Many people, and so many other families such as mine began shopping there much more during the recession, as reflected in their same-store sales. The reason? Because we’re all looking for a more affordable substitue to nights that we used to eat out. Whole foods fills that need very well. And even more suprisingly, it’s not that much more expensive than any of the other lesser grocery stores – we’ve noticed that about 30-40% of the stuff is actually cheaper.

    For this reason, I’m not sure Whole Foods is really the aspirational retailer that these researches think it is. And also the reason, I regret not buying more of it last year, when I noticed how busy the stores were and continue to be. I guess when it comes down to it, quality food is not something most people are willing to part with, especially when there is a relatively affordable option such as WF.

  • Jim Jubak on 19 February 2010

    djpoints, WFMI launched a huge campaign during the recession to convince folks that it wasn’t as expsensive as many people thought it was.(The company’s nickname was Whole Paycheck.) And they emphasize the low prices–I’d agree with you there–of their private label goods. I’d still call it an aspirational store. Last time I was there I aspired to buy some Berkshire pork. Do you know how good these piggies are? Damn tghe cost. And I saved 40 cents on 2 packages of organic Mac and Cheese.

  • viwi on 21 February 2010

    Jim,
    Whole Food is, indeed, not as expensive, as some people might think. You buy less junk (since now you start paying attention to all the prices of the junk food you buy) and you do not buy more food than you actually need. As a result, our bill went down.
    P.S. You can also notice that an average shopper at Whole Food weighs at least 20 pounds less than at Sam’s Club.

  • rolfer1 on 23 February 2010

    Jim, thin reeds indeed. Yes, consensus is now decent growth in Q1 & 2 of this year, then slow or no growth thru 2011 (that consensus has been in place for at least 6 months now.)

    How does credit card mailings (> 1 card per person in the US if your numbers are correct!), imply anything about growth or spending? Having a card is not spending. I haven’t held anything but 0% cards for over 3 years now, but still only “spend” when a real need arises.

    OK, I can see some uptick in M&A activity by larger, solid companies, but true growth? No. Unemployment must come down first (M&A also results in reduced staffs, no?).

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